Table of Contents

An introductory overview

Conditions of supply and demand

Price Elasticity and Demand

Entire Marketplace

Suggestion

In order to prepare the report, it is necessary to analyze and evaluate multiple data sources pertaining the the company in question. Data sources that are most useful include annual reports, sales reports and data on demand and supply. This report will, in other words, look back at the company’s past, assess its present, and forecast the future. Any business will benefit from the information provided on these elements. In this analysis, we will discuss topics like sales trends and profitability. All of these are essential for any company that aims to become a respected business. Netflix must analyze such factors thoroughly to ensure that its business is sustainable and continues to grow.

IntroductionOver recent decades, technological advances have radically changed the face of the planet. Modern technology, in particular positive changes, has significantly changed the way people live. This shift has also affected the entertainment industry. Prior to this change, movies were made and released in theaters. After the cinemas were outdated, they were released as VHS tapes. With the advancement of technology, movie and television productions are now released and sold on DVDs. Media streaming is the next technology advancement for the entertainment market if this continues. Netflix and other companies have enabled the streaming of entertainment materials in just seconds, from their homes. Netflix Inc. has the largest internet television network worldwide. There are more than 190 countries in which the 75 million members of the streaming network live. Members watch more than 125 Million hours of TV and movies per day. These include feature films, documentary series and original shows (Valentin E. K. (2014)). This research will examine the production costs at Netflix Inc., by analyzing the charges incurred, the trends in the industry, and the effects on Netflix. It will also critically examine and explore Netflix Inc.’s overall markets, including its market share and barriers to entry. The article will conclude with a recommendation on how Netflix should manage its production in the future. It will then be followed by recommendations on how to continue to successfully lead the streaming TV market. Netflix, Inc. offers commercial-free online streaming of TV shows, movie, documentaries, or original series. But the company didn’t start out that way. Reed Hastings founded the company in 1997 with an online movie-rental service. After the introduction of the popular subscription-based service in 2007, Hastings Corporation became an household name. Users create an account, select the movies they want to receive at their door and there is no limit on how many DVDs can be borrowed per month. Netflix started to crush their competitors (i.e. Blockbuster). In 2002, they went public and had 600,000. Three years after that, the number of users exploded to 4, 2 million. Netflix completely changed the game in 2007. Netflix launched its streaming service, which allows users to instantly access titles from their computers, without waiting for DVDs to arrive. In 2010, Netflix began to expand internationally, starting in Canada. Netflix currently has more than 104 million users worldwide. Although there are many advantages to using this company’s streaming services. Many users enjoy the “no-commitment” concept, which allows them to cancel their subscription at any point, without having to answer any questions. There are three different membership levels, each with a free month to test the service. Even though the company offers a DVD subscription, it is also available to stream on almost any device connected to the internet. This appeals to people who are used with instantaneous life. Netflix also has agreements with televisions and smartphones to install their “app”. In November, corporations once again responded to their customers’ demands – downloading content that eliminates internet connection. Travelers can benefit from this feature, particularly if they are travelling in an area where strong internet isn’t readily available. (Spangler)

The graph below shows the demand and supply conditions. It is clear that the sales of Netflix have been increasing over the last year. Strangely, the graph shows that Netflix’s prices are improving while demand is increasing. The Law of Demand is not in play here. This is in line with the Law of Supply, considering the licensing fees Netflix pays to major networks and the costs to create their own content. Netflix increased the subscription fee in 2016 to $11. 99/month is the highest price service. (Goldman)

Netflix’s subscribers will start to decline if prices rise more frequently or higher than their competitors. Users will switch to competitors’ services if they find similar products at a cheaper price. It is vital to take into account the user’s needs in the case of an inevitable increase in price due to the rising costs of production. Even governments are not ignoring the demand for streaming. Many states, cities, and counties are planning to impose sales taxes on streaming video, mobile apps, and e books. This tax was imposed because the idea behind it is similar to cable television. States are claiming a percentage of the sale because they still use electricity and make sales. Pennsylvania imposed the tax back in August 2016; if other states follow suit, Netflix may have to raise their prices. (Povich)

Price Elasticity in DemandThe supply of Netflix’s streaming video services seems to be inflexible. The total revenue is increasing. Aside from that, there are other companies such as Amazon or Hulu who offer similar services. Hulu offers similar services to Netflix and is therefore the main alternative. The monthly budgets of the two companies are almost identical. It is only a matter of personal taste that will decide how much weight to give the differences between Hulu and Netflix. Hulu is a good example. Hulu produces some original contents, and it airs many first-run shows. Episodes are then made available to watch on the website for a week after they have been broadcasted. They must accept that advertisements are a constant part of their programming (Bond). Netflix is a popular service with many different types of subscribers. Customers visit the site to find the best entertainment. Netflix is the preferred streaming service provider. I have a wide range of friends who are fans of both the licensed shows/movies and the original content that this service provides. The price is only $11, which is a small amount. With a price of only $9.99/month, it is not a major part of the budget for most consumers. Netflix raising its price again could have a major impact on customer demand. Netflix raised its subscription price by 60% in the past and lost around 810,000 subscribers.

Nevertheless, after a few years, the price increase had led to the addition of over 11 million new subscribers. Netflix executives were guilty of a serious miscalculation regarding the elasticity and demand of their product. They had failed to consider the fact that customers could choose other providers if they weren’t happy with Netflix. According to this concept, the price change must be correlated with the level of demand. As the number of streaming firms increases, so will the elasticity. One factor is more important than the others for the corporation. Netflix is a streaming television service that many users consider a necessity. (quick MBA)

Netflix may lose customers if the company announces a significant price increase. Based on previous trends it’s likely that customers will stay loyal to service providers. The market is a very competitive place. The customer will always select the service provider with the lowest cost. They can switch providers if they feel uncomfortable with a certain provider. Netflix must maintain a range of prices that are affordable for their customers. This will prevent them from switching to alternative streaming websites.

Netflix, Inc.’s costs have increased since 2013, as the graphs above show. COGS (costs of goods) are services that include exclusive content, advertising and employees. As the firm has grown in popularity, so have the operating costs. Netflix has more than 104 million customers, an increase of 600% from 2002. A growing number of streaming services have led to increased licensing costs. The firm set aside six billion dollars in its budget for licensing its content, both exclusive and non-exclusive. Netflix, Inc. was worth 61 billion dollars as of May 2017. Forbes ranks Netflix at the number five position of the world’s most innovative companies. Forbes points out that Netflix’s profitability and growth have been increasing year-on-year despite its high cost.

In June 2017, the company’s second quarter revenue was $2,800,000. The cost of the quarter came to $1,000,000. This indicated that the quarter had been profitable. Netflix incurs constant fixed costs that are present every year. Fixed costs include the cost of advertising, marketing, paying employees’ salaries, obtaining business licenses, leasing warehouses and renting office space. In 2017, the marketing budget of the firm was $274,000, while $267,000 went to technological development. The costs of these agreements are always changing. Netflix’s annual report from February 2014 stated that long-term content licenses with fixed costs were hindering the ability to operate. These costs directly affect the cash flow and results expected. Netflix’s decision to create original content is believed to be a result of a cost-benefit analysis. The licensing agreements are more expensive than the production costs. Original content can also be used to keep customers, since they are not available from competitors.

Overall MarketAs illustrated below, Datasmiths’ 2016 study shows that Netflix holds 51. 1% of all streaming services. Amazon Prime Video, which has a marketshare of 24, is Netflix’s closest competitor. 8%. These statistics show Netflix to be a major player on the market. Other competitors are fighting hard to make their mark. The pie chart reveals that Netflix has many competitors, including Amazon. As such, these statistics demonstrate that Netflix has the highest demand among customers.

In order to enter the market of streaming online, an organization would have to spend a lot of capital, and also need the right connections to networks to negotiate license agreements. It would take a huge IT team and a marketing team of exceptional quality to launch a brand. Amazon is currently the only major competitor to Netflix. Netflix is a well-established corporation, so a threat from a new competitor is unlikely. It is not easy to enter the streaming industry. To successfully enter the streaming market and establish companies that offer similar services to Netflix is no easy task. Netflix has oligopolistic business practices due to the lack of competition.

Netflix is able to influence subscribers very easily because there are so few competitors. Netflix has a unique offering that can’t be found anywhere else, including Hulu or Amazon Prime. Orange is the New Black received 19 Emmy Nominations alone this year. The show is Netflix Original and is only accessible to Netflix subscribers. Netflix is constantly on the lookout for ways to improve their streaming service. Netflix, in a July 17th letter to shareholders, shared their belief that this could be solved by focusing more on original content. This would not require a lot of licensing expenses. In doing so, Netflix will be able to reduce its operating costs and increase profitability. The theory appears to have been successful. In the letter, it was also mentioned that they have ninety-one Emmys for 27 of their movies and shows.

RecommendationConsidering the 91 Emmy nods, the Netflix management team made a wise decision to focus on original content. Profitability will increase if the company remains focused on a profitable area. Amazon Prime’s market share can rapidly increase. Disney will be ending its partnership in 2019 according to recent news. Netflix will have time to compensate for the loss. However, this is a difficult situation. Disney has resources to enter this market. Netflix will need to build a following by adding new content and/or signing licensing agreements. Hulu is the nearest replacement, so it’s worth keeping an eye on. Netflix will be able to offer original content to its customers if it continues to focus on producing this content. Netflix will always be able to gain an advantage in its business by being unique. Netflix’s loyal customers will continue to use the service even if prices increase. Netflix will continue to grow as long as it continues to provide a service that is important to customers.